the federal government should interfere in the market place only when necessary’. Only that, in his view, nationalizing a huge chunk of the financial sector was just one of those necessary things.
Mr Bush’s statement is, of course, an ultimate example of political double-speak – one of the biggest state interventions in human history is dressed up as another workaday market process. However, through these words Mr Bush exposed the flimsy foundation on which the myth of the free market stands. As the statement so clearly reveals, what is a necessary state intervention consistent with free-market capitalism is really a matter of opinion. There is no scientifically defined boundary for free market.
If there is nothing sacred about any particular market boundaries that happen to exist, an attempt to change them is as legitimate as the attempt to defend them. Indeed, the history of capitalism has been a constant struggle over the boundaries of the market.
A lot of the things that are outside the market today have been removed by political decision, rather than the market process itself – human beings, government jobs, electoral votes, legal decisions, university places or uncertified medicines. There are still attempts to buy at least some of these things illegally (bribing government officials, judges or voters) or legally (using expensive lawyers to win a lawsuit, donations to political parties, etc.), but, even though there have been movements in both directions, the trend has been towards less marketization.
For goods that are still traded, more regulations have been introduced over time. Compared even to a few decades ago, now we have much more stringent regulations on who can produce what (e.g., certificates for organic or fair-trade producers), how they can be produced (e.g., restrictions on pollution or carbon emissions), and how they can be sold (e.g., rules on product labelling and on refunds).
Furthermore, reflecting its political nature, the process of re-drawing the boundaries of the market has sometimes been marked by violent conflicts. The Americans fought a civil war over free trade in slaves (although free trade in goods – or the tariffs issue – was also an important issue).[1] The British government fought the Opium War against China to realize a free trade in opium. Regulations on free market in child labour were implemented only because of the struggles by social reformers, as I discussed earlier. Making free markets in government jobs or votes illegal has been met with stiff resistance by political parties who bought votes and dished out government jobs to reward loyalists. These practices came to an end only through a combination of political activism, electoral reforms and changes in the rules regarding government hiring.
Recognizing that the boundaries of the market are ambiguous and cannot be determined in an objective way lets us realize that economics is not a science like physics or chemistry, but a political exercise. Free-market economists may want you to believe that the correct boundaries of the market can be scientifically determined, but this is incorrect. If the boundaries of what you are studying cannot be scientifically determined, what you are doing is not a science.
Thus seen, opposing a new regulation is saying that the status quo, however unjust from some people’s point of view, should not be changed. Saying that an existing regulation should be abolished is saying that the domain of the market should be expanded, which means that those who have money should be given more power in that area, as the market is run on one-dollar-one-vote principle.
So, when free-market economists say that a certain regulation should not be introduced because it would restrict the ‘freedom’ of a certain market, they are merely expressing a political opinion that they reject the rights that are to be defended by the proposed law. Their ideological cloak is to pretend that their politics is not really political, but rather is an objective economic truth, while other people’s politics
Breaking away from the illusion of market objectivity is the first step towards understanding capitalism.
Thing 2
Companies should
the interest of their owners
Shareholders own companies. Therefore, companies should be run in their interests. It is not simply a moral argument. The shareholders are not guaranteed any fixed payments, unlike the employees (who have fixed wages), the suppliers (who are paid specific prices), the lending banks (who get paid fixed interest rates), and others involved in the business. Shareholders’ incomes vary according to the company’s performance, giving them the greatest incentive to ensure the company performs well. If the company goes bankrupt, the shareholders lose everything, whereas other ‘stakeholders’ get at least something. Thus, shareholders bear the risk that others involved in the company do not, incentivizing them to maximize company performance. When you run a company for the shareholders, its profit (what is left after making all fixed payments) is maximized, which also maximizes its social contribution.
Shareholders may be the owners of corporations but, as the most mobile of the ‘stakeholders’, they often care the least about the long-term future of the company (unless they are so big that they cannot really sell their shares without seriously disrupting the business). Consequently, shareholders, especially but not exclusively the smaller ones, prefer corporate strategies that maximize short-term profits, usually at the cost of long-term investments, and maximize the dividends from those profits, which even further weakens the long-term prospects of the company by reducing the amount of retained profit that can be used for re-investment. Running the company for the shareholders often reduces its long-term growth potential.
You have probably noticed that many company names in the English-speaking world come with the letter L – PLC, LLC, Ltd, etc. The letter L in these acronyms stands for ‘limited’, short for ‘limited liability’ – public
However, you may not have realized that the L word, that is, limited liability, is what has made modern capitalism possible. Today, this form of organizing a business enterprise is taken for granted, but it wasn’t always like that.
Before the invention of the limited liability company in sixteenth-century Europe – or the joint-stock company, as it was known in its early days – businessmen had to risk everything when they started a venture. When I say everything, I really mean everything – not just personal property (unlimited liability meant that a failed businessman had to sell all his personal properties to repay all the debts) but also personal freedom (they could go to a debtors’ prison, should they fail to honour their debts). Given this, it is almost a miracle that anyone was willing to start a business at all.
Unfortunately, even after the invention of limited liability, it was in practice very difficult to use it until the mid nineteenth century – you needed a royal charter in order to set up a limited liability company (or a government charter in a republic). It was believed that those who were managing a limited liability company without owning it 100 per cent would take excessive risks, because part of the money they were risking was not their own. At the same time, the non-managing investors in a limited liability company would also become less vigilant in monitoring the managers, as their risks were capped (at their respective investments). Adam Smith, the father of economics and the patron saint of free-market capitalism, opposed limited liability on these grounds. He famously said that the ‘directors of [joint stock] companies… being the managers rather of other people’s money than of their own, it cannot well be expected that they would watch over it with the same anxious vigilance with which the partners in a private copartnery [i.e., partnership, which demands unlimited liability] frequently watch over their own’.[1]
Therefore, countries typically granted limited liability only to exceptionally large and risky ventures that were deemed to be of national interest, such as the Dutch East India Company set up in 1602 (and its arch-rival, the British East India Company) and the notorious South Sea Company of Britain, the speculative bubble surrounding which in 1721 gave limited liability companies a bad name for generations.
